Question 1

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

A)   Its earnings become more stable.
B)   Its access to the capital markets increases.
C)   Its R&D efforts pay off, and it now has more high-return investment opportunities.
D)   Its accounts receivable decrease due to a change in its credit policy.
E)   Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.F) D) and E)
G) A) and D)

Question 3

The following data apply to Grullon-Ikenberry Inc. (GII) :  The company plans on distributing $50 million as dividend payments. What will the intrinsic per share stock price be immediately after the distribution?

Accepted Answer

A)   $6.32
B)   $6.65
C)   $7.00
D)   $7.35
E)   $7.72F) A) and E)
G) B) and E)

Question 4

Sheehan Corp. is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend per share. It finances with debt and common equity, but it wants to avoid issuing any new common stock during the coming year. Given these constraints, what percentage of the capital budget must be financed with debt?

Accepted Answer

A)   30.54%
B)   32.15%
C)   33.84%
D)   35.63%
E)   37.50%F) D) and E)
G) B) and D)

Question 5

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

A) True 
 B)False

Question 6

Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Accepted Answer

A)   $42,869
B)   $45,125
C)   $47,500
D)   $50,000
E)   $52,500F) None of the above
G) C) and D)

Question 7

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   If a company has a 2-for-1 stock split, its stock price should roughly double.
B)   Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
C)   Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
D)   Stock repurchases increase the number of outstanding shares.
E)   The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.F) None of the above
G) C) and E)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
B)   One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
C)   An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
D)   If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
E)   Stock repurchases make the most sense at times when a company believes its stock is undervalued.F) D) and E)
G) A) and E)

Question 10

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Accepted Answer

A) True 
 B)False

Question 11

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

A) True 
 B)False

Question 12

Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?

Accepted Answer

A)   37.2%
B)   39.1%
C)   41.2%
D)   43.3%
E)   45.5%F) A) and C)
G) B) and E)

Question 13

D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

A)   $100,000
B)   $200,000
C)   $300,000
D)   $400,000
E)   $500,000F) D) and E)
G) None of the above

Question 14

Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is CORRECT?

Accepted Answer

A)   Firm M probably has a lower debt ratio than Firm N.
B)   Firm M probably has a higher dividend payout ratio than Firm N.
C)   If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
D)   The two firms are equally likely to pay high dividends.
E)   Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.F) C) and D)
G) A) and B)

Question 15

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Accepted Answer

A) True 
 B)False

Question 16

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

A) True 
 B)False

Exam 14: Distributions to Shareholders: Dividends and Repurchases

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Correct Answer
verified

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Correct Answer
verified

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Correct Answer
verified

The following data apply to Grullon-Ikenberry Inc. (GII) : The company plans on distributing $50 million as dividend payments. What will the intrinsic per share stock price be immediately after the distribution?

Correct Answer
verified

Correct Answer
verified

Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?

Correct Answer
verified

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Correct Answer
verified

Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Correct Answer
verified

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Correct Answer
verified

D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Correct Answer
verified

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Correct Answer
verified

Correct Answer
verified

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 14: Distributions to Shareholders: Dividends and Repurchases

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Correct AnswerverifiedShow Answer

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Correct AnswerverifiedShow Answer

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Correct AnswerverifiedShow Answer

The following data apply to Grullon-Ikenberry Inc. (GII) : The company plans on distributing $50 million as dividend payments. What will the intrinsic per share stock price be immediately after the distribution?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?

Correct AnswerverifiedShow Answer

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Correct AnswerverifiedShow Answer

Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Correct AnswerverifiedShow Answer

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Correct AnswerverifiedShow Answer

D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Correct AnswerverifiedShow Answer

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct Answer
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